The turnaround has been piloted from the start by a new management team, led by CEO Carey Wood, who slashed costs and terminated unprofitable contracts. Management also has shifted its focus since 2009 from low-margin contract manufacturing, such as circuit-board assembly, to specialized manufacturing in highly regulated markets such as military aerospace and medical devices, which carries higher profit margins.

The results have been impressive. In fiscal 2012, ended June 30, gross margins widened to 17.2% from 7.1% at the trough in fiscal 2009. Sales climbed 10% from fiscal 2011 to $224 million, with earnings up 27%, to $9.5 million, or 92 cents a share.

The U.S. Navy is Sparton's biggest customer for underwater sonobuoys.
U.S. Navy

Investors were quick to spot the improvement; Sparton's shares (ticker: SPA) have rallied more than 700%, to $12.05, from $1 and change in 2009. But the stock remains underappreciated at 13.5 times trailing 12-month earnings of 89 cents a share, and more gains are likely.

Management is targeting $500 million in revenue by 2015, driven by acquisitions. The shares could rise 50% or more in the next 18 months.

FOUNDED IN 1900 AND based in Schaumburg, Ill., Sparton has a rich history as a manufacturer. At one point it was an automotive supplier, and is credited with inventing the car horn. Today the company operates in three segments—medical devices, defense, and electronics manufacturing, which it dubs "complex systems." Medical manufacturing accounts for 50% of sales.

In the defense segment, Sparton builds sonobuoys, underwater listening and locating devices designed to detect the presence of submarines. They are positioned in the water ahead of every carrier fleet to alert them to the presence of enemy submarines. A sonobuoy survives for about eight hours before it self-destructs. Sparton is the only U.S. manufacturer of sonobuoys, and one of two worldwide. The U.S. Navy is its primary customer.

Management is keen to shift the revenue mix to higher-margin activities. The defense business has the highest gross margins, at 23.6%; medical margins are 13.7%, and for complex systems, 10.7%.

To boost margins, Sparton has explored new growth initiatives. For example, it is planning to bundle the directional and listening technologies used in sonobuoys and market them for use in other unmanned defense systems, a growing market.

Sonobuoy sales also could see growth as the Navy moves in 2014 to deploy the devices via jets instead of prop aircraft. According to a fiscal 2011 budget estimate from the Navy, spending will increase 60% year over year in fiscal 2014, to $160 million, primarily due to the transition.

Management couldn't be reached for comment.

SPARTON'S OTHER PLANS include gaining market share in niche medical devices via acquisitions, and continuing to migrate to higher-margin work in complex systems.

In the September quarter, revenue fell 5% from the year-earlier period, and net income fell to $1 million from $1.5 million. The decline is temporary, and related to a delay in sonobuoy deliveries. Management is optimistic for the remainder of the fiscal year.

On Nov. 6 Sparton agreed to buy Onyx EMS, a medical-device manufacturer, for $43.3 million. The deal, expected to close at the end of the month, is a major one for Sparton, bringing in $50 million in annual revenue. While management currently is restricted from disclosing how accretive the purchase will be, it has said that Onyx has gross margins of 18%, higher than Sparton's own medical division. The deal will be financed with cash and borrowing under a credit facility. As of Sept. 30, Sparton had $43.1 million in cash to $1.6 million in debt. It generated $22 million in free cash in fiscal 2012.

Ross Taylor, a portfolio manager at Somerset Capital Advisors, whose firm owns shares of Sparton, is bullish on the acquisition. He thinks the deal could add 50 cents a share in annual earnings, bringing his fiscal 2013 earnings estimate up to $1.30 a share, and his fiscal 2014 estimate to $1.70 a share.

Applying a multiple of 12 times earnings to his 2014 estimate, Taylor thinks the stock could be worth $20.